Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 1 TEXAS MUTUAL INSURANCE COMPANY Tel: 512-224-3800 AMB#: 11453 FEIN#: 74-2615873 6210 East Highway 290, Austin, Texas, United States 78723 Web: www.texasmutual.com Fax: 800-359-0650 NAIC#: 22945 BEST'S RATING The company is assigned the classification of NR-5 (Not Formally Followed) as it is a company that A. M. Best gathers information on and reports on, but is not formally evaluated for the purposes of assigning a rating. FIVE YEAR RATING HISTORY Best's Date Rating 06/21/07 NR-5 06/02/06 NR-5 06/23/05 NR-5 06/25/04 NR-3 06/09/03 NR-3 KEY FINANCIAL INDICATORS Statutory Data ($000) Direct Net Pretax Period Premiums Premiums Operating Ending Written Written Income 2002 609,064 604,848 33,546 2003 674,353 665,257 95,389 2004 714,040 706,763 78,543 2005 701,956 696,850 61,529 2006 743,095 740,023 24,069 09/2006 563,972 561,967 73 09/2007 563,452 562,443-6,062
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 2 Statutory Data ($000) Total Policy- Period Net Admitted holders' Ending Income Assets Surplus 2002 219 1,740,088 619,672 2003 122,843 2,182,174 857,123 2004 114,666 2,605,486 1,040,257 2005 113,229 2,899,583 1,137,438 2006 68,887 3,303,272 1,261,597 09/2006 32,984 3,139,338 1,175,795 09/2007 33,566 3,524,466 1,298,636 Profitability Leverage Liquidity Inv. Pretax Overall Oper. Period Comb. Yield ROR NA Inv NPW Net Liq Cash- Ending Ratio (%) (%) Lev to PHS Lev (%) flow (%) 2002 102.6 4.9 6.9 65.5 1.0 2.8 155.3 172.3 2003 96.0 4.1 14.5 80.2 0.8 2.3 164.7 174.6 2004 100.3 3.7 11.2 84.2 0.7 2.2 166.5 169.3 2005 105.5 3.7 8.6 74.4 0.6 2.2 164.6 156.0 2006 113.1 4.2 3.3 78.5 0.6 2.2 161.8 155.6 5-Yr Avg 103.7 4.1 8.9 09/2006 115.7 XX 0.0 XX 0.6 2.3 159.9 144.6 09/2007 120.0 XX -1.1 XX 0.6 2.3 158.4 134.1 (*) Financial data for this company was obtained by A.M. Best from the regulatory authority representing that legal jurisdiction wherein the company is domiciled. The company's management has not reviewed the data reflected herein. BUSINESS REVIEW Texas Mutual Insurance Company, formerly The Texas Workers Compensation Insurance Fund, was created in August 1991, through the passage of House Bill 62 by the Texas legislature, operates as a domestic mutual insurance company licensed to sell workers compensation insurance in Texas. The company was created to operate competitively in the Texas workers compensation insurance market and became the insurer of last resort, beginning January 1, 1994, when the Texas Workers Compensation Insurance Facility ceased writing new workers compensation insurance policies. The company was capitalized by a $300 million bond issue authorized by state law. Repayment of the Revenue Bonds was to be provided through maintenance taxes assessed on all insurance companies authorized and admitted to write workers compensation insurance in the state of Texas. As of December 31, 1999, the company had defeased or provided for reimbursement all amounts pertaining to the Revenue Bonds. The company operates through a nine member Board of Directors. Four of the Board members are appointed by policyholders with the remaining five members, including the chairman, appointed by the Governor and confirmed by the Senate. 2006 BUSINESS PRODUCTION AND PROFITABILITY ($000)
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 3 % of Pure Loss Product Premiums Written Total Loss & LAE Line Direct Net NPW Ratio Reserves Workers' Comp 743,095 740,023 100.0 65.6 1,651,802 Totals 743,095 740,023 100.0 65.6 1,651,802 Major 2006 Direct Premium Writings By State ($000): Texas, $743,095 (100.0%). PROFITABILITY ANALYSIS Company Industry Composite Pretax Return Pretax Return Period ROR on Comb. Oper. ROR on Comb. Oper. Ending (%) PHS(%) Ratio Ratio (%) PHS(%) Ratio Ratio 2002 6.9-6.7 102.6 88.2 2.8-2.2 112.7 97.9 2003 14.5 32.7 96.0 84.9 6.1 22.3 103.4 92.5 2004 11.2 19.4 100.3 88.8 9.5 17.5 100.6 89.7 2005 8.6 9.0 105.5 92.2 15.0 17.6 98.8 85.7 2006 3.3 10.6 113.1 96.5 17.0 16.0 99.2 82.0 5-Yr Avg 8.9 13.2 103.7 90.4 10.4 15.2 102.5 89.2 09/2006 0.0 XX 115.7 99.4 XX XX XX XX 09/2007-1.1 XX 120.0 100.5 XX XX XX XX UNDERWRITING EXPERIENCE Net Undrw Loss Ratios Expense Ratios Income Pure Loss & Net Other Total Div. Comb Year ($000) Loss LAE LAE Comm Exp. Exp. Pol. Ratio 2002-37,935 65.3 11.1 76.3 9.9 11.7 21.6 4.6 102.6 2003 24,968 62.5 8.5 71.0 9.9 11.1 21.0 4.0 96.0 2004-3,274 61.7 9.2 70.9 10.7 11.1 21.8 7.6 100.3 2005-34,725 68.4 5.6 74.0 11.5 12.1 23.6 7.9 105.5 2006-97,265 65.6 8.4 74.0 12.0 12.1 24.1 15.0 113.1 5-Yr Avg 64.7 8.4 73.1 10.8 11.6 22.5 8.2 103.7 09/2006-89,114 64.6 9.4 74.0 XX XX 22.2 19.5 115.7 09/2007-113,191 62.0 9.9 71.9 XX XX 23.4 24.7 120.0 INVESTMENT INCOME ANALYSIS ($000)
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 4 Company Net Realized Unrealized Inv Capital Capital Year Income Gains Gains 2002 70,144-33,327-43,102 2003 72,913 27,454 118,602 2004 80,936 36,123 69,307 2005 95,015 51,700-15,686 2006 121,916 44,818 57,908 09/2006 89,600 32,912 10,964 09/2007 106,752 39,628 7,209 Company Industry Composite Inv Inc Inv Total Inv Inc Inv Growth Yield Return Growth Yield Year (%) (%) (%) (%) (%) 2002 4.1 4.9-0.4-1.2 4.8 2003 3.9 4.1 13.0-6.1 3.9 2004 11.0 3.7 8.7 10.3 3.8 2005 17.4 3.7 5.2 17.4 3.9 2006 28.3 4.2 8.0 15.5 4.1 5-Yr Avg 14.1 4.1 7.1 7.5 4.1 09/2006 XX XX 4.8 XX XX 09/2007 XX XX 4.9 XX XX INVESTMENT PORTFOLIO ANALYSIS 2006 Inv Asset Assets % of Invested Assets Annual Class ($000) 2006 2005 % Chg Long-Term bonds 2,135,174 68.2 70.6 10.4 Stocks 847,200 27.0 26.5 16.9 Affiliated Investments 19,195 0.6 0.7-3.7 Other Inv Assets 130,744 4.2 2.1 122.2 Total 3,132,313 100.0 100.0 14.4 2006 BOND PORTFOLIO ANALYSIS % of Mkt Val Avg. Class Class Struc. Struc. Asset Total to Stmt Maturity 1-2 3-6 Secur. Secur. Class Bonds Val(%) (Yrs) (%) (%) (%) (% of PHS) Governments 22.1 0.1 6.3 100.0 States, terr & poss 21.2-0.6 5.9 100.0 48.3 18.1 Corporates 56.7-0.1 4.7 90.1 9.9 24.4 24.5 Total all bonds 100.0-0.2 5.3 94.4 5.6 24.1 42.6
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 5 CAPITAL GENERATION ANALYSIS ($000) Source of Surplus Growth Pretax Total Net Operating Inv. Contrib. Year Income Gains Capital 2002 33,546-76,430 2003 95,389 146,056 2004 78,543 105,430 2005 61,529 36,014 2006 24,069 102,726 5-Yr Total 293,076 313,796 0 09/2006 73 43,876 09/2007-6,062 46,837 Source of Surplus Growth Other, Change PHS Net of in Growth Year Tax PHS (%) 2002 7,304-35,580-5.4 2003-3,994 237,451 38.3 2004-839 183,134 21.4 2005-362 97,181 9.3 2006-2,636 124,159 10.9 5-Yr Total -527 606,345 09/2006-5,591 38,357 3.4 09/2007-3,736 37,040 2.9 QUALITY OF SURPLUS ($000) % of PHS Dividend Requirements Year- Cap Stk/ Un- Stock- Div to Div to End Contrib. assigned holder POI Net Inc. Year PHS Cap. Other Surplus Divs (%) (%) 2002 619,672 100.0 2003 857,123 100.0 2004 1,040,257 100.0 2005 1,137,438 100.0 2006 1,261,597 100.0 09/2006 1,175,795 100.0 09/2007 1,298,636 100.0 LEVERAGE ANALYSIS
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 6 Company Industry Composite NPW to Reserves Net Gross NPW to Reserves Net Gross Year PHS to PHS Lev Lev PHS to PHS Lev Lev 2002 1.0 1.2 2.8 2.9 1.6 3.7 6.3 7.1 2003 0.8 1.1 2.3 2.4 1.6 3.3 5.7 6.4 2004 0.7 1.1 2.2 2.3 1.4 3.1 5.3 5.9 2005 0.6 1.2 2.2 2.2 1.2 2.9 4.8 5.3 2006 0.6 1.3 2.2 2.3 0.9 2.6 4.2 4.7 09/2006 0.6 1.3 2.3 XX XX XX XX XX 09/2007 0.6 1.4 2.3 XX XX XX XX XX PREMIUM COMPOSITION & GROWTH ANALYSIS Period DPW GPW Ending ($000) (% Chg) ($000) (% Chg) 2002 609,064 44.4 614,701 44.5 2003 674,353 10.7 674,417 9.7 2004 714,040 5.9 716,113 6.2 2005 701,956-1.7 706,591-1.3 2006 743,095 5.9 750,173 6.2 5-Yr CAGR 12.0 12.0 5-Yr Change 76.2 76.4 09/2006 563,972 6.7 569,563 7.1 09/2007 563,452-0.1 569,549 0.0 Period NPW NPE Ending ($000) (% Chg) ($000) (% Chg) 2002 604,848 46.0 487,788 37.8 2003 665,257 10.0 658,504 35.0 2004 706,763 6.2 701,188 6.5 2005 696,850-1.4 716,698 2.2 2006 740,023 6.2 735,611 2.6 5-Yr CAGR 12.3 15.8 5-Yr Change 78.7 107.8 09/2006 561,967 7.2 550,526 2.7 09/2007 562,443 0.1 546,787-0.7 LOSS & ALAE RESERVE DEVELOPMENT: CALENDAR YEAR ($000)
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 7 Original Developed Develop. Develop. Develop. Unpaid Unpaid Calendar Loss Reserves to to to Reserves Resrv. to Year Reserves Thru 2006 Orig.(%) PHS (%) NPE (%) @ 12/2006 Dev.(%) 2001 556,386 800,998 44.0 37.3 226.3 479,530 59.9 2002 697,631 887,978 27.3 30.7 182.0 570,655 64.3 2003 897,838 1,020,772 13.7 14.3 155.0 721,673 70.7 2004 1,113,457 1,185,122 6.4 6.9 169.0 912,762 77.0 2005 1,350,550 1,362,131 0.9 1.0 190.1 1,197,821 87.9 2006 1,615,918 1,615,918 219.7 1,615,918 100.0 LOSS & ALAE RESERVE DEVELOPMENT: ACCIDENT YEAR ($000) Original Developed Develop. Unpaid Acc Yr. Acc Yr. Accident Loss Reserves to Reserves Loss Comb Year Reserves Thru 2006 Orig.(%) @12/2006 Ratio Ratio 2001 193,146 175,611-9.1 60,185 70.8 101.9 2002 257,112 230,550-10.3 91,125 64.3 90.6 2003 363,296 291,797-19.7 151,018 60.2 85.2 2004 368,344 332,234-9.8 191,089 62.7 92.0 2005 386,727 368,978-4.6 285,059 68.3 99.8 2006 418,097 418,097 418,097 73.7 112.8 ASBESTOS & ENVIRONMENTAL (A&E) RESERVES ANALYSIS Company Net A&E Reserve Net Reserves Retention IBNR Year ($000) (%) Mix (%) 2002 259 100.0 2003 218 100.0 2004 194 100.0 2005 166 100.0 2006 144 100.0 Company Industry Composite Comb Comb Comb Comb Survival Ratio Ratio Survival Ratio Ratio Ratio Impact Impact Ratio Impact Impact Year (3 yr) (1 yr) (3 yr) (3 yr) (1 yr) (3 yr) 2002 0.1 2.2 2003 0.1 1.7 2004 0.5 0.1 0.1 8.3 1.4 1.7 2005 0.4 0.1 0.1 8.4 1.0 1.4 2006 0.3 0.1 0.1 7.9 0.5 0.9 CEDED REINSURANCE ANALYSIS ($000)
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 8 Company Industry Composite Ceded Business Rein Rec Ceded Business Rein Rec Ceded Reins Retention to PHS Reins to Retention to PHS Reins to Year Total (%) (%) PHS (%) (%) (%) PHS(%) 2002 59,131 98.4 8.0 9.5 90.9 64.3 79.5 2003 58,270 98.6 5.7 6.8 91.0 53.8 68.7 2004 83,492 98.7 7.1 8.0 91.2 44.5 58.0 2005 78,186 98.6 6.0 6.9 90.6 38.7 50.5 2006 72,746 98.6 5.0 5.8 90.4 33.9 43.3 2006 REINSURANCE RECOVERABLES ($000) Paid & Total Unpaid Unearned Other Reins Losses IBNR Premiums Recov* Recov US Insurers 44,656 7,912 52,568 Pools/Associations 2,342 421 2,763 Other Non-US 6,161 1,104 7,265 Total (ex US Affils) 53,159 9,437 62,596 Grand Total 53,159 9,437 62,596 * Includes Commissions less Funds Withheld INVESTMENT LEVERAGE ANALYSIS (% OF PHS) Company Industry Composite_ Class Real Other Non-Affl Class 3-6 Estate/ Invested Common Inv. Affil 3-6 Common Year Bonds Mtg. Assets Stocks Lev. Inv. Bonds Stocks 2002 7.7 2.7 0.4 54.7 65.5 5.9 39.6 2003 13.2 1.9 65.1 80.2 5.0 38.3 2004 12.6 1.8 69.8 84.2 3.8 33.6 2005 10.7 63.7 74.4 1.8 3.5 31.9 2006 9.9 1.6 67.0 78.5 1.5 3.3 28.1 LIQUIDITY ANALYSIS Company Industry Composite Gross Gross Quick Current Overall Agents Bal Quick Current Overall Agents Bal Year Liq (%) Liq (%) Liq (%) to PHS(%) Liq (%) Liq (%) Liq (%) to PHS(%) 2002 59.0 139.2 155.3 2.9 32.6 107.5 121.2 11.2 2003 55.5 150.8 164.7 1.7 35.6 110.7 123.8 9.8 2004 71.7 154.3 166.5 1.3 37.0 113.6 125.5 7.5 2005 67.8 154.2 164.6 1.0 39.4 115.2 126.9 6.9 2006 63.7 152.5 161.8 1.1 38.4 118.1 129.6 6.0 09/2006 XX 150.0 159.9 0.8 XX XX XX XX 09/2007 XX 149.0 158.4 1.0 XX XX XX XX CASH FLOW ANALYSIS ($000)
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 9 Industry Company Composite Underw Oper Net Underw Oper Underw Oper Cash Cash Cash Cash Cash Cash Cash Year Flow Flow Flow Flow (%) Flow (%) Flow (%) Flow (%) 2002 189,400 263,541 50,120 152.0 172.3 123.8 142.8 2003 238,035 316,321-46,951 156.1 174.6 136.1 147.4 2004 235,386 326,011-5,593 150.1 169.3 137.7 149.1 2005 187,615 290,433-27,496 136.2 156.0 131.9 146.3 2006 177,563 307,876 51,331 132.0 155.6 119.8 134.0 09/2006 102,394 198,861 48,358 123.0 144.6 XX XX 09/2007 56,978 165,535 16,778 111.7 134.1 XX XX HISTORY The Texas Workers Compensation Insurance Fund was formed in August 1991 through the passage of House Bill 62 by the Texas Legislature as a governmental corporation licensed to sell workers' compensation insurance in Texas effective January 1, 1992. The Texas Workers' Compensation Insurance Fund was created to operate competitively in the Texas workers' compensation insurance market and became the insurer of last resort, beginning January 1, 1994, when the Texas Workers' Compensation Insurance Facility ceased writing new workers' compensation insurance policies. Effective September 1, 2001, the Texas Workers' Compensation Insurance Fund became Texas Mutual Insurance Company (the "company") through the passage of Texas House Bill 3458. The legislation mandates that the company operate as a domestic mutual insurance company with the consent of the Commissioner of Insurance to write workers' compensation insurance in the State of Texas. Although the Texas Legislature established the company, all monies, revenues and assets belong solely to the company and may not be borrowed or appropriated by the State of Texas. In addition, as a mutual organization, the company is no longer subject to the Texas Sunset Act, Chapter 325, of the Government Code. The company is treated by the State of Texas as a commercial insurance company subject to the rules and regulations of the Texas Department of Insurance ("TDI"). The company will continue to serve as a competitive force in the Texas workers' compensation insurance market and as the insurer of last resort. MANAGEMENT The Texas Workers' Compensation Insurance Fund had a nine-member Board of Directors (the "Board") made up of Texas business employers who were appointed by the Governor and confirmed by the Senate. Effective September 1, 2001, the company continues to have a nine-member Board; however, the Governor appoints only five members, including the chairman, and the company's policyholders elect the remaining four. Legislation prohibits the appointment of any person who has a potential conflict of interest because of other involvement within the insurance industry. Officers: President, Russell R. Oliver; Chief Operating Officer, Ronald O. Wright; Senior Vice Presidents, Perry M. Barron, Lisa M. Corless, Elliot S. Flood, Terry L. Frakes, Cecily A. Gallagher, L. Randall Johnson, William A. McLellan, Jr., Mary B. Nichols. Directors: Judy S. Broussard, Richard A. Cooper, Sandra Kuprion-Thomas, Jacob M. Monty, Delia M. Reyes, James D. Ross, George Wesch, Jr., Charles H. Whiteside, Martin H. Young, Jr. REGULATORY An examination of the financial condition is being made as of December 31, 2004 by the Insurance Department of Texas. The 2006 annual independent audit of the company was conducted by Deloitte & Touche, LLP. The annual statement of actuarial opinion is provided by Mark M. Mulvaney, Milliman USA. TERRITORY
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 10 The company is licensed in Texas. BALANCE SHEET ($000) ADMITTED ASSETS 12/31/2006 12/31/2005 2006 % 2005 % Bonds 2,135,174 1,933,424 64.6 66.7 Preferred stock 1,505 0.0 Common stock 845,695 724,664 25.6 25.0 Cash & short-term invest 85,800 34,469 2.6 1.2 Other non-affil inv asset 20,495 0.6 Real estate, offices 19,195 19,936 0.6 0.7 Total invested assets 3,107,864 2,712,492 94.1 93.5 Premium balances 163,228 153,942 4.9 5.3 Accrued interest 24,449 24,366 0.7 0.8 All other assets 7,731 8,783 0.2 0.3 Total assets 3,303,272 2,899,583 100.0 100.0 LIABILITIES & SURPLUS 12/31/2006 12/31/2005 2006 % 2005 % Loss & LAE reserves 1,651,802 1,385,380 50.0 47.8 Unearned premiums 319,958 315,545 9.7 10.9 Conditional reserve funds 161 698 0.0 0.0 All other liabilities 69,755 60,521 2.1 2.1 Total liabilities 2,041,676 1,762,145 61.8 60.8 Unassigned surplus 1,261,597 1,137,438 38.2 39.2 Total policyholders' surplus 1,261,597 1,137,438 38.2 39.2 Total liabilities & surplus 3,303,272 2,899,583 100.0 100.0 SUMMARY OF 2006 OPERATIONS ($000)
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 11 FUNDS PROVIDED STATEMENT OF INCOME 12/31/2006 FROM OPERATIONS 12/31/2006 Premiums earned 735,611 Premiums collected 731,615 Losses incurred 482,743 Benefit & loss related pmts 233,934 LAE incurred 61,665 Undrw expenses incurred 178,376 LAE & undrw expenses paid 210,096 Div to policyholders 110,091 Div to policyholders 110,022 Net underwriting income -97,265 Undrw cash flow 177,563 Net investment income 121,916 Investment income 130,896 Other income/expense -583 Other income/expense -583 Pre-tax oper income 24,069 Pre-tax cash operations 307,876 Realized capital gains 44,818 Net income 68,887 Net oper cash flow 307,876 INTERIM BALANCE SHEET ADMITTED ASSETS 03/31/2007 06/30/2007 09/30/2007 Cash & short term invest 64,311 177,872 102,577 Bonds 2,240,127 2,253,125 2,291,473 Preferred stock 1,499 1,496 1,494 Common stock 832,926 849,899 837,408 Other investments 58,606 58,153 76,037 Total investments 3,197,470 3,340,544 3,308,990 Premium balances 187,411 189,286 181,423 Reinsurance funds 1,122 1,004 1,194 Accrued interest 26,695 26,905 27,148 All other assets 6,278 6,083 5,711 Total assets 3,418,976 3,563,822 3,524,466 LIABILITIES & SURPLUS 03/31/2007 06/30/2007 09/30/2007 Loss & LAE reserves 1,713,829 1,775,272 1,831,678 Unearned premiums 347,213 347,139 335,613 Conditional reserve funds 161 161 161 All other liabilities 39,518 170,744 58,377 Total liabilities 2,100,721 2,293,317 2,225,829 Unassigned surplus 1,318,255 1,270,505 1,298,636 Policyholders' surplus 1,318,255 1,270,505 1,298,636 Total liabilities & surplus 3,418,976 3,563,822 3,524,466 INTERIM INCOME STATEMENT
Best's Insurance Reports - Property Casualty, US, 2007 Edition (2007 9-Month Supplement, Version 2007.3) Page 12 Period Ended Period Ended Increase/ 09/30/2007 09/30/2006 Decrease Premiums earned 546,787 550,526-3,739 Losses incurred 339,036 355,695-16,659 LAE incurred 54,228 51,737 2,491 Underwriters expenses incurred 131,621 124,873 6,748 Div to policyholders 135,094 107,336 27,758 Net underwriting income -113,191-89,114-24,077 Net investment income 106,752 89,600 17,152 Other income/expenses 377-414 791 Pre-tax operating income -6,062 73-6,135 Realized capital gains 39,628 32,912 6,716 Net income 33,566 32,984 582 INTERIM CASH FLOW Period Ended Period Ended Increase/ 09/30/2007 09/30/2006 Decrease Premiums collected 543,038 548,388-5,350 Benefit & loss related pmts 179,169 176,908 2,261 Undrw expenses paid 175,093 162,665 12,428 Div to policyholders 131,798 106,421 25,377 Underwriting cash flow 56,978 102,394-45,416 Investment income 108,180 96,881 11,300 Other income/expense Pre-tax cash operations Net oper cash flow 377-414 791 165,535 198,861-33,326 165,535 198,861-33,326